European markets end without direction

Shares in Airbus parent EADS slammed after announcing A380 delays

By

SarahTurner

LONDON (MarketWatch) -- European stock markets couldn't find direction on Wednesday as merger-and-acquisition related gains for Bayer, Vinci and Credit Suisse Group and a Wall Street advance was offset by continued inflation worries and declines in the aerospace sector after EADS announced delays to its A380 plane construction program.

The German DAX Xetra 30 index (1876534) finished 0.3% higher at 5,305, while the U.K.'s FTSE 100 (UKX) index weakened 0.2% at 5,506 and the French CAC-40 index (1804546) fell 0.1% at 4,615.

The moves come after U.S. core inflation increased 0.3% for the third month in a row in May, ahead of analyst expectations of a 0.2% rise, putting pressure on the Federal Reserve to keep raising interest rates. See full story.

"I do think that there remains an inflation risk. Once you get too much inflation, then on the whole, central banks have to take quite tough action to get that under control," said Denis Clough, head of European equities at Schroders.

He said the chance of inflation getting out of control is much higher now than it was twelve months ago. An increase in inflation fears, coupled with a gradual rise in bond yields, has been the main trigger for the recent declines in European equity markets, Clough added.

However, U.S. stocks shook off a weak start to trade higher on Wednesday, helped by technology shares after several broker upgrades. See Market Snapshot.

On the downside, aerospace and defense company and Airbus parent EADS (005730) came under sharp selling pressure after it warned that deliveries of the new A380 superjumbo would be delayed by up to seven months because of a production problem.

EADS shares slipped 26% after it warned that operating profit would be cut by "about 500 million euros" ($625 million) each year between 2007 and 2010. See full story.

Deutsche Bank downgraded EADS to hold from buy after the news, saying: "The announcement of further slippages on the A380 came as a material negative surprise. The cost and cash flow impact of this will likely be material.

"These further problems on the A380 will no doubt also increase concerns over Airbus' ability to manage A350 development risk."

Airbus is 80% owned by EADS and 20% owned by Britain's BAE Systems (BA), which dropped 1.1% in London. BAE Systems has announced plans to sell its 20% Airbus stake, but hasn't reached an agreement with EADS on price.

Drug makers, retailers

Drug maker Bayer
BAY, +2.22%
(575200) rallied 6.9% after Germany's Merck KGaA (659990) agreed to sell its stake in Schering
SHR, -0.61%
(717200) ahead of a midnight deadline, meaning that Bayer will be able to complete its takeover of Schering. See full story.

Schering rose 2.1%, while Merck, which recorded a 400 million euro gain on its stake buying over the last week, climbed 6%.

Also on the deal front, French insurance group Axa (012062)
AXA, -0.53%
dropped 1.8% after agreeing to buy from Credit Suisse
CSR, +3.13%
its Winterthur insurance unit for 7.9 billion euros ($9.9 billion) in cash.

Europe's second-largest insurer, Axa said the deal will boost its Continental presence and give it a lift in Eastern Europe and Asia. The deal will give the French insurer an additional 13 million clients in 17 countries. See full story.

Credit Suisse rose 1.8% in Switzerland, helped by the deal being all-cash and above its previous forecasts.

Vinci (012548) leaped 8.2% as Veolia Environnement
VE, +0.20%
(012414) may make a bid for the French construction firm that has seen boardroom squabbling. Veolia plunged 8%, with speculation that each Vinci holder will receive two Veolia shares.

Tesco's total sales climbed 10.4% in the first quarter of fiscal 2007, after a strong start to the year at its international operations and continued growth in the U.K. Comparable U.K. sales grew 4.5%, excluding fuel, and by 5.5% including fuel.

Shares of Tesco dipped 0.8% in London, after having risen for the past month.

"It's a typical Tesco announcement -- nothing much to surprise either way, just very solid," said Merrill Lynch analysts.

Inditex, which owns the Zara and Pull and Bear line of stores, rose 7.7% after saying first-quarter net income rose 20% to 150 million euros, while sales increased 22% to 1.7 billion euros due to a rise in selling space and higher comparable sales.

"Detail is limited, but the flat gross margin is probably ahead of expectation and costs continue to grow faster than sales, but by one of the smaller gaps of recent quarters," said analysts at Credit Suisse.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.